SECURING WATER, SUSTAINING GROWTH

SECURING WATER, SUSTAINING GROWTH Report of the GWP/OECD Task Force on Water Security and Sustainable Growth

SECURING WATER, SUSTAINING GROWTH Report of the GWP/OECD Task Force on Water Security and Sustainable Growth

The Global Dialogue The Global Dialogue for Water Security and Economic Growth is a joint initiative of the GWP and the OECD to promote and accelerate a transition to water security, by connecting policymakers and practitioners through global and country level consultations and through an expert task force analysis of the links between water security and sustainable economic growth. About GWP The mission of the Global Water Partnership (GWP) is to advance governance and management of water resources for sustainable and equitable development. GWP is an intergovernmental organisation and a global network of 13 Regional Water Partnerships, 85 Country Water Partnerships and more than 3,000 Partner organisations in 172 countries. The GWP network is committed to building a water secure world. About OECD The mission of the Organisation for Economic Co-operation and Development (OECD) is to promote policies that will improve the economic and social well-being of people around the world. The OECD provides a forum in which governments can work together to share experiences and seek solutions to common problems. We work with governments to understand what drives economic, social and environmental change. OECD work on water focuses on water economics and governance. It aims at facilitating the reform of water policies, so that they are better attuned to current and future challenges. The views expressed in this report do not necessarily represent the official views of the GWP, nor of the OECD and the governments of its constituent countries. Source citation This report should be referenced as: Sadoff, C.W., Hall, J.W., Grey, D., Aerts, J.C.J.H., Ait-Kadi, M., Brown, C., Cox, A., Dadson, S., Garrick, D., Kelman, J., McCornick, P., Ringler, C., Rosegrant, M., Whittington, D. and Wiberg, D. (2015) Securing Water, Sustaining Growth: Report of the GWP/OECD Task Force on Water Security and Sustainable Growth, University of Oxford, UK, 180pp. University of Oxford 2015 South Parks Road Oxford OX1 3QY United Kingdom ISBN 978-1-874370-54-3 (print) ISBN 978-1-874370-55-0 (online) Design and layout: One Ltd, 2015 Printer: Elanders, Sweden, 2015

Table of contents SECURING WATER, SUSTAINING GROWTH Report of the GWP/OECD Task Force on Water Security and Sustainable Growth Acknowledgements 8 Executive Summary 12 Chapter 1: Introduction 32 Chapter 2: Water security, sustainable growth, and well-being 36 2.1 The water security challenge 38 Framing the water security challenge 39 The importance of water endowments 41 2.2 The complex economics of water 44 The economic dynamics of water-related investments 44 Appraising investments in water security 46 Finding the right water security investments 47 2.3 A theoretical model of the dynamics of water-related risk, investment, and growth 50 2.4 An empirical analysis of the impact of hydrological variability on growth 54 The impact of hydro-climatic variability on economic growth 54 Two characteristics that influence vulnerability to water-related risks 62 2.5 Summary 64 Chapter 3: The global status of water security 68 3.1 Four headline risks 71 3.2 Risk-based indicators of water security 72 3.3 Global analysis of water security: (1) water scarcity 74 Likelihood of water scarcity 74 Consequence of surface and groundwater water scarcity 79 Projecting future agricultural risks and opportunities 83 Consequences of water insecurity for energy security 85 4

Table of contents 3.4 Global analysis of water security: (2) floods 87 Projecting future risks 93 3.5 Global analysis of water security: (3) inadequate water supply and sanitation 95 3.6 Global analysis of water security: (4) ecosystem degradation and pollution 100 3.7 Aggregating water security risks 104 3.8 Toward common metrics of water security 108 3.9 Summary 110 Chapter 4: Pathways to water security 114 4.1 Introduction 117 4.2 Pathways to water security 118 Pathways 118 Portfolios 119 Challenges and opportunities 120 Key institutional actors and policy leaders 121 4.3 Approach 122 Case study selection 122 Timelines 123 4.4 Case studies 125 River basins 125 Cities 136 Aquifers 147 4.5 Findings 156 General lessons 156 Learning from contexts: cities, rivers, and aquifers 160 River and lake basin pathways 162 Aquifers 164 International transboundary basins: rivers, lakes, and groundwater 165 Toward strategic and adaptive pathways 166 Chapter 5: Conclusions 172 5.1 Key findings 174 5.2 Key gaps 177 5.3 Toward a more water-secure future 178 5

Table of contents Figure 1 Conceptual framework of the dynamic of water security and sustainable growth 40 Figure 2 Growth model relating country wealth to investment in protective and productive water-related assets 50 Figure 3 Theoretical dynamics of a water poverty trap 51 Figure 4 Overview of risk-based indicator framework 73 Figure 5 Mean and variation of runoff: (a) mean annual runoff (b) coefficient of variation (CV) of monthly runoff 75 Figure 6 Water use 76 Figure 7 Water storage capacity 76 Figure 8 Index of frequency of shortages of water available for use 77 Figure 9 Transboundary water dependence: which water-scarce countries are highly dependent on transboundary flows 78 Figure 10 Total national food crop production 79 Figure 11 Coefficient of variation (CV) of annual food crop production 80 Figure 12 Figure 13 Variability in food crop production and commodity prices, plotted as probability density functions 81 Welfare gains and losses in a scenario in which there is more water available for irrigation, helping to suppress the effects of hydrological variability 82 Figure 14 Child malnutrition (2010) 83 Figure 15 Future irrigation water use 84 Figure 16 Future food crop production 84 Figure 17 Vulnerability of thermal power plants to unreliable cooling water availability 86 Figure 18 Hydropower generation capacity and potential 86 Figure 19 Expected annual damage due to fluvial and coastal flooding 89 Figure 20 Expected annual damage due to fluvial and coastal flooding as a share of GDP 89 Figure 21 Damage due to floods at different return periods 90 Figure 22 Flood risk to people 91 Figure 23 Expected number of people exposed to flooding at different flood return periods 92 Figure 24 People affected by floods (1980-2013) 92 Figure 25 Scenario analysis of future flood risk 94 Figure 26 Deaths from water supply and sanitation related diseases 96 Figure 27 Percentage of population without access to improved water supply 96 Figure 28 Changes in population without access to improved water supply 98 Figure 29 Percentage of population without access to improved sanitation 98 Figure 30 Change in access to improved sanitation 99 Figure 31 Economic losses from inadequate water supply and sanitation 99 Figure 32 Aggregated pollution hazard 101 6

Table of contents Figure 33 Fraction of months in which flows are less than environmental flow requirements 101 Figure 34 Threatened amphibians 102 Figure 35 Relative economic impacts of water insecurity 105 Figure 36 Relative economic impacts of water insecurity, per capita 105 Figure 37 Cities, aquifers, and river basins selected as case studies 124 Figure 38 Common elements of case study timelines 124 Figure 39 Timeline of the Colorado River Basin 130/131 Figure 40 Timeline of the Rhine River Basin 132/133 Figure 41 Timeline of the São Francisco River Basin 134/135 Figure 42 Timeline of Singapore 140/141 Figure 43 Timeline of Mexico City 142/143 Figure 44 Timeline of Gauteng Province 144/145 Figure 45 Timeline of the Guaraní Aquifer System 152/153 Figure 46 Timeline of the Nubian Sandstone Aquifer System 154/155 Figure 47 Stylized sequential decision analysis 168 Table 1 Table 2 Results from fixed effects panel regression on country level per capita GDP growth (1980-2012) from 113 countries, conditioned on human water stress, and % GDP from agriculture 60 Fixed individual and year effects panel regression results for countries, by income classifications 61 Table 3 Top ten countries for risks to the aquatic environment 103 Table 4 Top ten countries for people at risk of water insecurity 107 Table 5 Top ten countries (with population greater than 1 million) for proportion of population at risk of water insecurity 107 Box 1 Economic growth, hydrological variability, and investment in water security 42 Box 2 Annual per capita GDP growth and annual runoff, for three countries 55 Box 3 Specifications of the econometric analysis 56 Box 4 Simulation of reduced drought effect on economic growth 59 Box 5 Countries with the largest reduction in growth due to drought 59 Box 6 Countries most economically vulnerable to hydro-climatic effects 63 Box 7 Analysis of transboundary water security 78 Box 8 GLOFRIS and DIVA 88 Box 9 Box 10 Definitions of water supply and sanitation from the WHO/UNICEF Joint Monitoring Programme (JMP) 97 Aquifers as vast freshwater reservoirs: using groundwater storage for water security 148 7

Acknowledgements

Acknowledgements This Report* was prepared as part of the GWP/OECD Global Dialogue on Water Security and Sustainable Growth. and Hannah Leckie of the OECD. Additional support from the World Bank and the Oxford Martin School is gratefully acknowledged. The Report is jointly authored by the Global Dialogue s Task Force. The members of the Task Force are: Claudia Sadoff, the World Bank (Chair); Jim Hall and David Grey, University of Oxford, UK (Co-Chairs); and (listed in alphabetical order) Jeroen Aerts, VU University Amsterdam, Netherlands; Mohamed Ait-Kadi, Global Water Partnership, Sweden; Casey Brown, University of Massachusetts, USA; Anthony Cox, Organisation for Economic Co-operation and Development, France; Simon Dadson, University of Oxford, UK; Dustin Garrick, McMaster University, Canada (Pathways Research Coordinator); Jerson Kelman, University of Rio de Janeiro, Brazil; Peter McCornick, International Water Management Institute, Sri Lanka; Claudia Ringler and Mark Rosegrant, International Food Policy Research Institute, USA; Dale Whittington, University of Manchester, UK, and University of North Carolina at Chapel Hill, USA; David Wiberg, International Institute for Applied Systems Analysis, Austria. We gratefully acknowledge the leadership and oversight provided by the Global Dialogue s two Chairs: Angel Gurría, Secretary-General of the OECD; and HE Ellen Johnson Sirleaf, President of Liberia. We recognize the Global Dialogue s sponsors, the Global Water Partnership (GWP) and the Organisation for Economic Co-operation and Development (OECD). We are grateful to the Danish International Development Agency (Danida) for their financial support of the Dialogue. We thank the Dutch Ministry of Infrastructure and Environment for its financing of case studies informing our work, and the CGIAR Research Program for Water, Land and Ecosystems (WLE) for supporting the crop modeling underlying parts of the Report. Special thanks go to: Ursula Schaefer-Preuss, Ania Grobicki, Fraser MacLeod, Alan Hall, Noumbissi Tenku, Steven Downey, Sara Ehrhardt and members of the Technical Committee of the GWP; and to Xavier Leflaive, Kathleen Dominique, Gerard Bonnis, We thank the Research Teams within many institutions, whose essential work of literature review, analysis, and modelling forms the foundation of the Report. These teams include: Franziska Gaupp, Kevin Wheeler, Simon Abele, Justin Rhodes, Yuuki Peters, University of Oxford, UK; Tingju Zhu, Gauthier Pitois, Ricky Robertson, Sherman Robinson, International Food Policy Research Institute, USA; Heather O Leary, Ana Martine Melgaard, Oheneba Boateng, McMaster University, Canada; Hassaan Khan, Patrick Ray, University of Massachusetts, USA; Jane Zhao, University of North Carolina at Chapel Hill, USA; Lucia De Stefano, Complutense University of Madrid, Spain; Philip Ward, Brenden Jongman, VU University Amsterdam, Netherlands; Robert Nicholls, University of Southampton, UK; Jochen Hinkel, Daniel Lincke, Global Climate Forum, Germany. We thank several individuals and institutions that generously provided access to invaluable datasets, including: Charles Vorosmarty, City University New York, USA; Richard Taylor, Tracy Lane, International Hydropower Association, UK; Marc Jeuland, Duke University; Amandine Pastor, Wageningen University, Netherlands; Hessel Winsemius, Deltares, Netherlands; Willem Ligtvoet, Arno Bouwman, PBL Netherlands Environmental Assessment Agency, Netherlands; Guy Hutton, World Bank, USA; International Water Management Institute, Sri Lanka; International Institute for Applied Systems Analysis, Austria. We acknowledge the information provided by 40 national consultations, carried out in 2013 and 2014 by the GWP network, with support from: the Swiss Agency for Development and Co-operation; the United Nations Development Programme (UNDP); and Danida. We recognize a consultation within India, sponsored by the OECD Knowledge Sharing Alliance. The Task Force benefitted from comments received at three high-level meetings, held in Singapore (2 June 2014), Stockholm (1 September 2014), and Paris (27 November 10

Acknowledgements 2014). Participants in the meetings included Angel Gurría, Secretary-General of the OECD, France; Ursula Schaefer-Preuss, Chair of the Global Water Partnership, Sweden; Melanie Schultz van Haegen, Minister of Infrastructure and Environment, Netherlands; Chen Lei, Minister of Water Resources, China; Alok Rawat, former Secretary for Water Resources, India; Benedito Braga, President of the World Water Council, France; Choi Gyewoon, CEO, K-Water, Korea; Kapil Mohan, Water Resources Department, Government of Karnataka, India; Herbert Oberhaensli, Vice-President, Nestlé, Switzerland; Ania Grobicki, Executive Secretary of the Global Water Partnership, Sweden; Kim Chang-Gil, Research Director, Korea Rural Economic Institute (KREI), Korea. We thank the Expert Advisers who shared their knowledge of river basins, aquifers, and cities across the world. Their help enabled development of the case studies and timelines of pathways to water security. We thank (in alphabetical order): Masood Ahmad (Indus); Rosalind Bark, Kevin Wheeler (Colorado River Basin); Chris Binnie (London); Don Blackmore (Murray-Darling River Basin); Lucia De Stefano (Ebro River Basin; Upper Guadiana Aquifer System); Ousmane Dione (Senegal River Basin); Michael Edmunds (Nubian Sandstone Aquifer system); Stephen Foster (groundwater; the Guarani Aquifer system); Ricardo Hirata (Guarani Aquifer system); Fernando J. González Villarreal, Jorge Alberto Arriaga Medina (Mexico City); Jerson Kelman (Sao Francisco River Basin); Anoulak Kittihoun, Ton Lennaerts (Mekong River Basin); Gail Krantzberg, Savitri Jetoo (Great Lakes); Michael Muller, Barbara Schreiner (Gauteng City complex); Maria Teresa Ore, Javier Chiong (Ica Valley); Robert Osborne (Apalachicola River Basin); Sanjay Pahuja, Aditi Mukherji (Ganges groundwater system); Mariya Pak Feuer (Aral Sea); Zhonghe Pang (North China Plain); Salman Salman (Nile River Basin); Bridget Scanlon (Ogallala Aquifer); Cecilia Tortajada (Singapore); Hong Yang (Beijing); Eelco van Beek, Marjolijn Haasnoot, Hans Middelkoop, Frans Klijn (Rhine River Basin). Finally, we thank the following for undertaking essential tasks: Cheryl Colopy, Matthew Roberts (Editors); Karis McLaughlin, University of Oxford (communications and logistics); ONE Ltd, Oxford (design). 11

Executive Summary

Executive Summary For millennia, humankind has struggled to develop water resources for domestic water supplies, to provide irrigation, and to limit flood losses. This struggle to leverage water-related opportunities and manage water-related risks, while addressing social and environmental demands, is at the heart of water security. Most of the world s developing countries remain relatively water insecure. Most developed countries invested heavily in water security, often starting early on their path to growth. These developed nations are now relatively water secure, but must continuously adapt and invest to maintain water security in the face of climate change, deteriorating infrastructure, economic development, demographic change, and rising environmental quality expectations. Today, the challenge of water security is global, and growing. Achieving and sustaining water security, in both developed and developing countries, is likely to increase in complexity and priority - not only as climate change intensifies, but also as the demands of economic growth increase. The criticality of this challenge is reflected in the World Economic Forum s 2015 Global Risks Report, in which water is ranked as the global risk with the single greatest potential impact on economies over the next ten years. Its importance is also signalled by the proposed development of a dedicated Sustainable Development Goal for water. The objective of this Report is to promote sustainable growth and well-being, by providing empirical evidence to guide investment in water security. It seeks to: analyze the dynamics of water security and growth; quantify water-related risks and opportunities and their trajectories; and assess the experience of past pathways of investment toward water security. The Report focuses on growth: where, how, and how much, water security affects growth. The Report adopts a risk-based approach to identify the hazards and vulnerabilities of a lack of water security. Water security, sustainable growth, and well-being Water-related risks (such as scarcity, floods, access, and resource degradation) are growing, as population growth and economic growth put greater pressure on water resources - pushing more people and more assets into harm s way. Water-related risks are also growing due to climate change, as water availability becomes less predictable, and as extreme weather events become more common. Where multiple water risks are present, the challenge of achieving water security will be compounded. Although we focus on risks in this analysis, it must be emphasized that water is not only destructive - it is also profoundly productive. Water is essential to all life - and to households, agriculture, industry, energy, and transport. Thus, investment in water security is not only a matter of protecting society from specific waterrelated risks; it is an investment that supports economic growth and social well-being. While economic growth can enhance risks by increasing the value of exposed assets, growth also provides the resources needed to manage water and waterrelated risks. Growth enables investment in institutions (defined broadly to include agencies, rules, and incentives), information systems (hydro-meteorological, economic, and social), and infrastructure (natural and constructed), as well as investment into vital research and development of innovative technologies, and financial risk management tools. Policies and infrastructure investments are needed to enhance water security; to allocate water between alternative uses; to deliver water at specific times, places, and prices; to ensure water quality; and to protect people and assets from water-related hazards. All of these can create opportunities and reduce risks for different regions, sectors, and communities. This, in turn, can have a profound impact on economic growth, inclusiveness, and the structure of economies. 14

Executive Summary Conceptual framework of the dynamic of water security and sustainable growth Moreover, as the world globalizes, waterrelated risks that were once considered local supply limitations or weather hazards are increasingly seen as regional and global challenges. Globalization can help mitigate local water-related challenges through food trade, financial risk management tools, foreign direct investment, and cooperative disaster warning and response mechanisms. Yet, the negative impacts of these risks can also be propagated through the global economy, and through social disruptions, population displacement, disease, and species and habitat losses. 15

Executive Summary Framing the water security challenge Sustainable economic growth, wealth, and human well-being are at the heart of the Report s framing of the water security challenge. Recognizing the environmental, social, and inter-generational significance of water management, we have framed the water security challenge in terms of sustainable growth. Well-being is also a key element of this conceptual framing, as many of the values associated with water security are non-financial in nature, i.e., physical security, dignity, equity, ecosystem integrity, and recreation. As illustrated in the conceptual framework diagram, a country s water endowment (i.e., water availability, quality, and variability) influences the level of investment needed to achieve a chosen level of water security. Investments to manage water resource endowments can modify this dynamic: moderating the effects of hydrological variability by providing reliable water delivery at acceptable prices, quantities, and quality; and by protecting lives and livelihoods against water-related disasters. There is growing evidence that the endowment of hydrological complexity is very different between most rich and poor countries. Most rich countries enjoy relatively manageable water endowments (i.e., simple hydrologies providing relatively reliable, plentiful water resources), and have made the investments needed to manage these hydrologies. Many poor countries face difficult hydrologies, and hence require greater investment to achieve water security. These countries are often the least able to afford such investments, as the box shows. Water security is not a static goal: it is a dynamic continuum that will alter with changing climates, growing economies and asset stocks, and resource degradation. As social, cultural, and aesthetic priorities and values evolve, water security will evolve with them. Investing in water security Not all water-related investments will be beneficial. Investments may be excessively costly, may not lead to the intended benefits, may result in harmful and perhaps unintended impacts upon people and the environment, or may close off more beneficial future investment opportunities. Identifying the range of effects water security may have on economic growth - in a rigorous manner - is a challenge for several reasons. First, because water is such a pervasive input into so many economic activities, it is difficult to sort out statistically how water-related investments may affect any one of the many pathways leading to economic growth. There is no small irony here: because water is so important for so many reasons, it is difficult to actually show, statistically, the importance of water-related investments to economic growth. Second, the causal links between water-related investments on the one hand, and economic growth on the other, clearly run in both directions. Water-related investments can increase economic productivity and growth, while economic growth provides the resources to invest in institutions and capital-intensive water infrastructure. Finally, water-related investments can increase human well-being without also increasing national income or economic growth as they are conventionally measured. At the project level, cost-benefit analysis is still arguably the best tool available to assess specific water-related investments. A good deal of work is being done to refine cost-benefit methodologies, in particular to take better account of environment and social costs; but the question of what constitutes good practice remains a topic of debate. There is a clear need to identify and avoid poor investments in water security, and, even with its well-known limitations, cost-benefit analysis remains a necessary and useful tool to appraise specific water-related investments. At the basin or state level, it is important to look beyond individual projects to dynamic, adaptive pathways and their impacts on economic growth, equity, and the structure of economies. 16

Executive Summary Economic growth, hydrological variability, and investment in water security Note: The horizontal axis summarizes hydrologic variability. The vertical axis is a composite indicator of investment in infrastructure and institutional capacity. The dots represent all river basins with populations greater than 2 million, coloured to indicate high (green), middle (yellow), and low (red) levels of GDP per capita (using World Bank definitions). The coloured contours are a linearly interpolated surface reflecting the association between variability, water security investments, and GDP. From: Hall et al. (2014). This graphic illustrates the relationship between economic growth, hydrological variability, and investment in risk mitigation. It shows that wealthy river basins (green dots, clustered in the upper left-hand quadrant) generally feature simpler hydrologies and larger investments in water security. Poorer basins (red dots, clustered in the lower half of the chart) have invested less in water security, and many face complex hydrologies. The investment required to transition from water insecurity to water security is greatest in those basins with highly variable hydrology (see coloured contour lines). 17

Executive Summary This requires performing cost-benefit analysis on sequences (or portfolios) of projects and carefully considering how pursuing a specific project may foreclose future options. It raises challenging problems of quantifying the wider benefits of water investments on the economy. Water policies and infrastructure investment decisions will have long-lasting impacts on development options across economies. Finally, in finding the right investments, it is essential to take special account of social, cultural, and environmental values; and to recognize that the impacts of water management decisions tend to greatly affect the poor, women, and the environment. Given this, multi-criteria evaluation techniques may be needed to supplement cost-benefit analysis. Regulations may be needed to ensure fulfilment of social imperatives. A theoretical model of the dynamics of waterrelated risk, investment, and growth To understand better the dynamics of investment in water security, we developed a growth model relating country wealth to investment in protective and productive water-related assets. Our theoretical analysis showed that when an economy is exposed to water-related risks there is a benefit attached to early investment in assets that mitigate those risks and protect productive assets. Countries that can make such investments protect their growth prospects from water-related threats and can therefore better harness the productive benefits of water-related investments. By contrast, in situations where hydrological hazards cause losses that affect other sectors of the economy, the economy can experience a significant water-related drag that limits the ability to harness water-related opportunities. Nonetheless, we find that the trajectories of changing national wealth over time are strongly context-dependent. They rely on specific suites of policy choices and investment decisions. Where a country is heavily exposed to climate-driven losses (in particular, for example, where agriculture dominates), the likelihood of substantial feedbacks between water-related losses and national wealth is strong and we see situations in which a poverty trap is possible. In contrasting situations where the economy is more effectively disconnected from water-related losses - either through economic diversification or water-related policies, practices, and infrastructure that limit vulnerabilities - there is a much lower chance of experiencing water-related limits to growth. Poor countries that are particularly vulnerable, because of difficult water endowments and agriculture-dependent economies, can become trapped in a cycle of economic losses and under-investment that inhibits growth. In order to overcome the water-related drag on growth, these countries will need targeted and sustained investment to protect their most important assets, seize their greatest water-related opportunities, and build resilience to water-related shocks. In particular, the model reveals that even in an interacting hydro-economic system, the route from poverty to wealth is not best found through water-related investments alone. The fastest improvements in economic growth arise through investments in water-related assets that are combined with measures to create broad-based growth across multiple sectors of the economy. An empirical analysis of the dynamics of water security and growth at the global scale An econometric analysis (a fixed-effects panel regression) was performed across 113 countries, to determine whether there is 18

Executive Summary empirical evidence of a statistically significant impact of hydro-climatic variables, including hazards, on countries per capita GDP growth. This econometric analysis focused upon the effects of hydrological variability on growth in GDP. From this perspective on water security, countries whose economic performance is resilient to water security-related variables - such as runoff, floods, and droughts - are relatively water secure. Countries where growth is strongly correlated with these factors are relatively water insecure. The findings confirm that water insecurity acts as a drag on global economic growth. Both our empirical and theoretical analyses demonstrates the importance of investment in water security for development - and the importance of development for investment in water security. Water and water-related hazards have a statistically significant effect on economic growth that historically has been at least as important, and likely more important, than temperature effects. Runoff, which can be thought of as fluctuating annual water availability, was shown to have a statistically significant effect on annual economic growth. Drought and flood were also shown to have statistically significant negative impacts on growth. Together, they reflect the multiple ways in which water and water hazards affect economic growth. These results have important implications for economists assessing the potential economic costs of climate change. The results underscore that studies neglecting water may underestimate the economic consequences of climate change, especially in the most sensitive countries. On drought specifically, an analysis was undertaken to calculate the cumulative effect of drought over time (1980-2012). The results showed the clear benefits of reduced drought impacts, and demonstrated how the effect of droughts can compound over a long period. In Malawi, for example, a 50 percent reduction in the drought effect led to a 20 percent higher per capita GDP at the end of the simulation. In the case of Brazil, the reduced drought effect (by 50 percent) led to GDP per capita that was 7 percent higher. The countries that stand to reap the greatest benefits from drought reduction were concentrated in the Middle East, Africa, South America, and Southeast Asia. The effects of hydro-climatic variables on growth are strongest in countries that are poor (low income), and those that have high water stress (a measure based on per capita water resources), high dependence on agriculture (>20 percent of GDP from agriculture), or both. These countries tend to be concentrated in Sub-Saharan Africa and South Asia, along with a few countries in South America and Europe. The particular vulnerability of countries under water stress suggests that as water stress increases worldwide, managing water effectively will become significantly more important for sustaining global economic growth. And the OECD s baseline projections indicate that by 2050, 3.9 billion people will be subject to severe water stress. The global status of water security The impacts of water insecurity materialize through a wide range of different mechanisms for people, households, businesses, and communities. Water scarcity results in reduced crop yields, hydropower plant output, and thermal power plant cooling, which can subsequently push up food and energy prices. Floods damage homes and other floodplain assets, harm people, and disrupt businesses and supply chains. Inadequate water supply and sanitation increases mortality and morbidity, reduces labour productivity, and increases healthcare costs. Pollution and degradation inhibit ecosystems capacity to deliver ecosystem services. The analysis of risk involves quantification of hazards, exposure, and vulnerability. Records of the impacts of risks provide further (though often incomplete) evidence about the scale of risk. The language of risk provides a general framework within which the many facets of water insecurity can be incorporated. Analysis of risk provides evidence that feeds directly into cost-benefit analysis. However, quantification of risks is challenging, especially at a broad scale, so our risk estimates are uncertain and inevitably contain significant gaps, in particular in relation to impacts upon people and the environment, which are not readily monetized. 19

Executive Summary Overview of risk-based indicator framework To assess the status of water security, we have analyzed water-related risks on a global scale, focusing upon four headline risks: (1) droughts and water scarcity; (2) floods; (3) inadequate water supply and sanitation; and (4) ecosystem degradation and pollution. Water scarcity materializes through the interplay between hydrological variability, human demands for water (for agricultural, industrial, energy, and municipal purposes), and water infrastructure systems. Commonly adopted metrics of water scarcity quantify the balance between water availability and demand on average - overlooking seasonal variation in supply and demand, and the buffering effect that storage provides. We have developed a new aggregate model of water scarcity that operates on a monthly basis for every large river basin globally (see facing page). Even taking into account the effects of investment in water infrastructure, the risks of scarcity are most severe in South Asia and northern China; and signicant risks of water shortage exist in all continents. The risks are increasing in all locations - and most notably in India and Pakistan, where demand for irrigation water in particular is projected to increase. Scarcity and hydro-climatic variability contribute to volatility in food crop production. This is particularly pronounced in Africa, but also notable in South America, Central Asia, and parts of Europe. Our findings show that enhanced water security can help stabilize food crop production and prices. The probability of global wheat production falling below 650 million tons per year is reduced from 83 percent to 38 percent. And the probability that the price of rice could exceed US$400 per ton is reduced from 21 percent to 0.7 percent. The potential global welfare gain, from securing water to existing irrigators, was estimated at US$94 billion for 2010. This analysis does not capture the potentially significant benefits of additional investments in agricultural efficiency, or expansion in irrigated areas, that might be fostered by greater water security. Floods are an extremely (and increasingly) damaging form of water-related hazard. Floods in Thailand during 2011 resulted in US$46 billion in economic losses, and US$16 billion in insured losses. Our global risk analysis estimates an expected annual flood damage of US$120 billion per year from property damage alone; with almost half of that economic risk in North America. By the 2030s, in the absence of adaptation, coastal flood risk is projected to increase by a factor of four; while fluvial flood risk could more than double. The risk estimates are sensitive to assumed flood protection levels - thereby demonstrating how important flood protection measures are in reducing vulnerability to flood risk. Sea level rise, subsidence, population growth, and economic growth mean that flood risk in coastal cities and estuaries will, in future, 20